UK business activity surges in August

British business activity sped up this month and cost pressures were the weakest in over three years, according to a survey that signalled growth momentum going into the second half of 2024.

Investors slightly scaled back their bets on a Bank of England interest rate cut next month after the preliminary “flash” estimate of the UK S&P Global Composite Purchasing Managers’ Index rose in August to 53.4 from 52.8.

That was the highest reading since April and above the median forecast of 52.9 in a Reuters poll of economists, adding to positive economic indicators inherited by the new government of Prime Minister Keir Starmer.

Sterling shot to a more than one-year high against the dollar on the back of the figures, which data company S&P Global said were consistent with the economy expanding at a quarterly rate of 0.3 per cent.

While that pace of growth would mark a slowdown from the first half of the year, after a brief recession in 2023, it is stronger than the typical pace of the past two years.

The picture of the British economy painted by the survey was stronger than readings from Germany and France which are suffering a sharp manufacturing downturns – although France saw stronger service sector growth thanks to the Olympic Games.

“Today’s release probably won’t be enough to trigger a back-to-back interest rate cut in September,” said economist Ashley Webb from consultancy Capital Economics.

“But it lends some support to our view that services inflation will continue to fade and rates will be cut from 5.0 per cent now to 4.5 per cent by the end of this year.”

The BoE cut borrowing costs from a 16-year high of 5.25 per cent earlier this month but Governor Andrew Bailey and other top officials have signalled they might not follow that up with rapid further reductions in rates.

Investors were assigning a less than 30 per cent chance of a September rate cut after the survey was released.

A Reuters poll of economists suggested the BoE will cut interest rates just once more this year, in November.

Cost pressures faced by businesses increased at the weakest rate since January 2021, while the PMI’s gauge of businesses’ price increases also fell.

“The latest survey data therefore help lower the bar for further interest rate cuts, although the still-elevated nature of inflation in the service sector suggests that policymakers will move cautiously,” Williamson said.

The PMI for the services sector, which dominates Britain’s economy, rose to its highest level since April at 53.3, up from 52.5 in July and above the 52.8 poll consensus.

Factories also showed improved growth, with the manufacturing PMI hitting 52.5 from 52.1, its highest level since June 2022. The sector added jobs at the fastest pace in more than two years.

A separate survey from the Confederation of British Industry painted a gloomier picture, with new orders contracting again in August – albeit at a slower pace than in July.